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Expect Yelling From China, Mexico, Europe, Importers

An Import Levy is on its way according to US tax policy chief Kevin Brady.

I firmly believe such tariffs will destroy jobs in the US and Globally, but my opinion does not matter. Others will soon be yelling as well.

“I do expect China and Europe and Mexico to yell about this,” says Kevin Brady.

Kevin Brady, the chief tax policymaker on Capitol Hill, launched a robust defence of his proposal to tax imports and sought to tie it to President Donald Trump’s “America first” economic agenda just as the new president appears to waver on the idea.

The plan to penalise importers and incentivise American exports has emerged as the most contentious part of the biggest proposed overhaul of the tax code in 30 years, a process that begins in Mr Brady’s Ways and Means committee in the House of Representatives.

“I do expect China and Europe and Mexico to yell about this,” Mr Brady said. “They have a tax advantage built in because America voluntarily gives them and their products a significant tax advantage over ours here in the United States and gives them a tax advantage in their own country as well. That unbalanced approach will not continue.”

Today foreign competitors “adjust” their taxes at their borders by adding taxes to American-made products and taking taxes off their own, he said, but the US did not.

By killing that “completely backwards” feature — which he would do by not letting US companies deduct import costs from their taxable income — Mr Brady said he would eliminate the price advantages of Chinese steel, Mexican cars and foreign oil.

But he faces a fierce battle over his plans. Big importers including retailers, apparel makers and the billionaire Koch brothers have united against the proposal, arguing it would cripple businesses that cannot source their products in the US and force them to raise prices for consumers.

But he backtracked soon afterwards, telling the Axios news service that the report did not accurately reflect his views and that the border tax adjustment was “certainly something that is going to be discussed” in White House negotiations with congressional Republicans.

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Strongly agree. I fail to see why anyone thinks that the Chinese are not already winning a trade war against us. One which started in the mid 1990’s and continues today, with an aggregate $4.3 Trillion trade surplus in favor of China. If there’s a further “trade war” which we initiate by blocking this distorted trade, it is China which will “lose” if it does not float its currency. The idea that we can benefit by cheap goods while destroying our manufacturing resources and the technological competition they enable is laughable.

Except if China does float its currency, it will likely depreciate significantly, otherwise the Chinese wouldn’t have needed to spend over a trillion to (somewhat unsuccessfully) protect it from declining.

Depends. Have you ever tried to buy airline tickets? Or asked your neighbor how much they paid for the exact same flight? Sometimes you pay half price to fly from Paris to Toronto if you stop over in Detroit, but if you get off in Detroit, the price is even higher.

Airlines know that filling the plane is better business than flying with the plane half empty. Pricing is much more complicated than cost of production. Some passengers subsidize others, and the subsidized passengers are defraying the fixed costs like the pilot and the plane and landing bills.

The same goes for countries. Industrial policy might mean that foreign consumers are getting a better deal than home consumers, because those export earnings are required to import physical capital, or because increased scale is needed to go to the next level of efficiency, or market share is required to launch other products, or because the country is better off producing its own stuff less cheaply to fund its own infrastructure and capital. Does industrial policy work? Of course. Look at Germany, South Korea, Japan, Thailand, and many other examples. In Russia they see sanctions as a good thing (in some ways), leading to a boom in its own agricultural sector. How much sense does it make that European farmers with expensive land, high costs, and higher wages export cheaper produce to Russia where land and labor is plentiful and cheap?

Tariffs are a consumption tax. No different than the sales tax hikes in Japan, and probably with similar results. The GOP will view the revenues as deficit reduction or tax cut offsets, and the Democrats will see it as a permanent new source of funding for social programs that can be ratcheted up every few years. So, a Dem-GOP consensus on revenue raising without overt tax increases. Like drilling an oil well.

If tariffs raise prices, the FED will get the price inflation they have been loudly wishing for. Dollar devaluation via inflation will make deficits easier to finance. Environmentalists will get back the polluting steel mills and factories they fought against, and be reinvigorated now that the Keystone Pipeline is a done deal again.

Of course, the Chinese will reduce purchases of American agricultural products, and get their soybeans, corn and grains from Argentina, Brazil and elsewhere. If relations get really bad, they might figure what the heck and invade Taiwan to draw the USA into another Asian war and divert their own people from the economic difficulties. The USA can destroy China’s cities, and they will move into their backup (ghost) cities. The USA has no backup cities, if Russia joins the fray alongside China and it goes nuclear. Neo-cons will celebrate, as they will have their War on Russia via the indirect China route. Neo-cons have clearly not given up, and since Iran, Syria and Ukraine have failed to create a Russian war, let Trump stumble into it via China blunders.

Amen Mish…… I love buying Chinese steel at whatever price they want to sell,,,
That should get some squalling…
Trump approves pipeline… Good
Then he says they have to use American made pipe… Bad,
where the heck and by what authority does he get to dictate where a company buys steel pipe,,, and in the process drive up the cost of this project that will get passed on to who???

One of the reasons America cannot compete is medical costs. Another is the 1$trillion or so for military spending. [You have to add in the VA, interest on the debt, Dept of Energy [nukes], secret budgets, Foreign Aid, supplementary war spending, etc etc]. Mediocre educational results is another. Those are a much bigger deal than so-called bad deals.

Pre-1900s USA did not honor copyrights, patents, trade secrets, etc. and was big on industrial espionage. USA publishing houses “stole” works of English authors without payment, stole industrial secrets, ripped off factory plans to create its industry, etc. USA back then was like China today, and the British Empire was the loser. Now USA is an Empire on the defensive, and not enough to “steal” from the rest of the world.

Winning the trade war could be tantamount to losing for the USA. Major export earner for USA is still agriculture, by a wide margin. Remember rise in GDP from soybean exports in 2016? China can send USA trade deficit skyrocketing and GDP down simply by sourcing its agricultural needs elsewhere. Bringing back a few factories will not compensate much in the macro-economic sense. Trump can be judged by GDP and trade deficit metrics.

Agriculture will make Trump the loser in a China trade war by GDP and trade deficit metrics. One of Trump’s first choices in Nov. was an ambassador to China from Iowa, a former governor who led agricultural delegations to meet Chinese leaders. So, likely Trump will recognize that China is right about everyone losing in a trade war. If things get bad for one side, as it did for Japan when squeezed by the USA in the 1930s, the War Hawks in Japan rose in power and Pearl Harbor led to a brutal Pacific War. If China invaded Taiwan, what would Trump do? No good choices there, so an aggressive China response would be a metric for branding Trump a loser even if it results in more factory jobs in the USA. Voters would make him a one-term president (loser), versus two-term president (winning metric).

How can agriculture be a major (export) earner for the US when there are so many subsidies? This applies to many other countries as well. How can subsidies to export industries make them into an earner? How can tax-free industrial areas be earners, if the industries there are not contributing to the infrastructure they use, or to the health care funds of their employees?

Japanese car companies are the most protected and subsidized in the world, when you count the hundreds of billions Japan has spent to keep the Yen weak. Without the aid of Japan’s central bank, there would be no car industry in Japan.

Mish, I too believe Trumps 35% tariff will work. It’s not very often that I disagree with you but this is one of those rare moments. Most of the foreign manufactures built factories here in the USA over years . Most recently for my memory is SANY Corp a Chinese manufacturer built a huge facility in Atlanta for their cranes. Swedens Volvo purchased several failing USA companies such as Clark Michigan, wheel loaders and Mack Truck just examples basically were assembly facilitie. The
Atlanta area, South Georgia, Houston, Seattle, San Diego, and New Port News, Virginia areas have these assembly plants. There are many many more and even more will follow. Where Trumps economic stimulus plan is going to have a tough time will be finding enough raw materials to make Steel. Unless of course the iron and steel mines here in the USA go to double reduction facilities using Taconite tailings.

After all these year we’have to agree that free trade works until somebody decides to violate the terms. TheUS has gotten screwed because the WTO never does anything about it. So Now what? It’s back yo square one.

Totally agree. Mish and other free traders conveniently ignore all the tariffs already in place around the world. It is ok for them to protect their society, cut America from their market but we must open our borders unconditionally to trade. This is all about transferring Americas wealth to other countries. Trump is going to attempt to reverse this trend.

To my knowledge, China imposes today higher tariffs on many US goods than the US does on Chinese goods. In addition, there are many obstacles put in the way of foreign companies to do business in China. So, Jiping’s Davos address to the audience was pure propaganda of a guy who knows damn well that he could go down next year if Chinese exports would further crumble. He is shitting his pants.

Trump as president is what I always imaged it was like when one of those 14YO royal kids became king after their father died/was killed in the 1400’s. Whew. And we are only 4 days into this travesty. How much more crazy can Trump go?

Remember those WallyMart stores that were closed and supposedly outfitted into FEMA camps for the”bad machines” that needed to be reprogrammed? Well, they are coming to take you away, Ha Ha, he je, to the funny farm where life is beautiful all the time…

I think the single most complicated area in all of financy econy stuff is in the area of international trade.

For a fact, people have no understanding of currency devaluation and its benefits-consequences, that part I watch everyone get wrong time and time again.

Also by basic net accounting, declaring winners due to trade imbalance. By accounting standards if two assets are transferred, there is no imbalance. So there is a serious problem in how trade imbalances are thought about.

It’s whether you can consume all your own production and the benefits vs consequences of import export that I try not to think much about for fear of it preoccupying me. It really is very complicated.

I’ve always liked the idea of free trade. But when Germany builds plants in Mexico, specifically for the purpose of selling a product to the U.S., instinct tells me something is very wrong there. An arbitrage is being exploited.

It seems to me, on the surface, that it is the economies such as China, with a focus on exporting that should be shitting a brick right now. But in reality production is the only true wealth, so why not re-tool your economy for domestic consumption and end of problem. Truly confuses me.

China and Germany both have to look over their shoulders.
if Germany has a problem with Trump so does the EU.
What the paymater feels, the EU handout beneficiaries are made to feel too.
Certainly the trade with the US is one-sided.

Mish – of US consumer spending – are there any indications as to how much is via:

1) Paid labour (out of wages)?
2) How much via US Gov distributions to population?
3) How much via personal debt for foreign cars etc?

That seems to be the problem. It appears Americans are buying on debt. China is selling everything and doing it with IOU’s. Americans are clearly purchasing more than they are producing. If it were purchase of productive assets, no problem. But I highly doubt that is the case.
Once again… Very complicated to analyze.

Yuan is near pegged, meaning no matter how many dollars produced ( via individual or national US debt) they buy the same, they do not devalue to restrict trade. The dollars collected by China are reinvested by the Chinese state into US ( gov. and bank) . Yuan may devalue now if floated, if floated in 2000 it may have strengthened, there is no proof in speculating past with present.

To me that is the main mechanism, all the other agreements are dressing. Obviously the above framework was part of opening trade with China.

So the US has partly adjusted its monetary and financial reality to that of China, that is to say the dollar and its economy have been pegged to Chinese state capitalist organisation.

You might say the peg is Chinese, but as long as you trade your currency for its, you are half of the peg and of what that peg both represents and leads to.

“Free and Fair Trade” requires laws in all counties to be the same, whether the citizens really want those laws. This clearly demonstrates sovereignty is the cost of “Free and Fair Trade”. As has been pointed out in prior blogs, one of the unaccounted costs in Chinese products is severe pollution. If all countries had the same business laws, then the cost of shipping would be the cost difference. Global trade of manufactured goods would be replaced by companies building factories in foreign markets.

“Zones” will use their consumers as a weapon. This is one basis of the EU.
Rather than trade war more like “access to my corral” war.
Bigger the number of sheep in the corral the more influence and leverage.

Why are so many (including Trump) ignorant about the Trade Deficit? Why do they ignore investment? Would a software developer on a 2D modeling program leave one of the squares out of the pythagorean theorem to prove a point? Do electricians say that V=I instead of V=IR as it suites them?

I’ll tell you why. First, economics is a study of human behavior that cannot be modeled mathematically. Second, the first point allows politicians to manipulate the system to gain more power. (this manipulation includes self-manipulation).

Conservatives who aren’t politicians (or crony businessmen) and also believe in protectionism have been duped.

EXCERPT FROM ARTICLE (Emphasis Added): “Today foreign competitors“adjust” their taxes at their borders by adding taxes to American-made productsand taking taxes off their own, he said, but the US did not. By killing that “completely backwards” feature — which he woulddo by not letting US companies deduct import costs from their taxable income —Mr Brady said he would eliminate the price advantages of Chinese steel, Mexicancars and foreign oil.” MISH, The Deck is stacked against USA Products ab initio!!! IF the 1st Sentence above is TRUE, THEN the USA for years (NO, make that Decades) has been playing the Import / Export Game with Other Countries w/ BOTH Hands tied behind its Back!!!

You absolutely MUST agree that this set up (if in fact is True) is Grossly Unfair to USA! ERGO, the suggested solution by Rep. Brady in the Article really doesn’t begin to go far enough. The Real Solution is to demand that all Other Countries that engage in such Practices described in the 1st Sentence above MUST Cease & Desist w/ such Practices immediately!

THEN the World will have Fair Trade — Right Now it surely is Truly UNFAIR TRADE against the USA ~~~ AND THUS Donald Trump is Right that Fair Trade does NOT Exist (although I’d venture a guess for the Wrong Reason, b/c I’d bet Donald isn’t even aware how one-sided against the USA the game is Now).

MISH, Don’t you Agree?

P.S.: A Real Service you can do for your Readers (& to absolutely Cement my above Argument) is to discover whether the practices set out in the 1st Sentence Quoted above are in fact TRUE & Let us know the Answer — You have the CONTACTS & therefore can quite readily do this! MISH, Will you follow up on this?

TARIFFS or any thing that resembles them will not work. They never have and never will. Industry moved from Wisconsin, Michigan, Pennsylvania, etc to the South. That is tantamount to jobs “going over seas” for the workers in those northern states that lost their jobs. I don’t recall anyone in Michigan bitching or moan that those low wage workers in lets say Alabama or Tennessee stole their jobs, and the Michigan legislature needs to tariff goods from Alabama. In fact, that very thing occurred under the Articles of Confederation, and it was quickly leading to a complete collapse in trade among the several states at the time. The Constitution’s Commerce Clause is a direct result of those “tariffs” among the several states. The fact of the matter is that those jobs left the north for a more friendly business environments in the south. Some then left for even friendly business environments overseas. The consumer won by paying less in both cases. Those jobs that did stay in the U.S. were quickly replaced by 1) a robot or 2) completely eliminated through production methods that increased productivity.

Everyone runs a “trade deficit” with your local grocery or car dealership, but the world keeps on spinning doesn’t it?

Mish is dead on about this. You will pay much higher prices for your stuff, and the jobs that Trump is promising will not materialize. We will all be worse off in the end.

Many “Republicans” railed against Ron/Rand Paul for being isolationist when in fact they are both non-interventionists when it comes to foreign policy, but 100% for free trade. It certainly looks like the Republicans got the isolationist they were so afraid of in Trump. Good luck with that.

In general, I like the idea of free trade. But it may need to be modified for modern times.

The classical notion is that some countries or societies are better at provided goods than others and free trade will ensure the lowest overall effort in enjoying the goodies.

The trouble now is that what is really being traded is labor. The technology to produce goods (even complex, high tech things) can be readily downloaded to almost all but the most backward countries. So the primary factors of production now becomes labor costs (Including all the regulatory and safety issues) and local fiscal policy like taxes.

What has happened is that a lot of jobs went to China and far east and the West has paid them very well for junk and things that are not really required to live a good life. What is new is that the governments are willing to go into incredible levels of debt to transfer wealth to emerging countries in return for a mass of goods (mostly superfluous).

Maybe a controlled trade war is necessary to tap the brakes on this unbridled consumerism at the expense of US unemployment and huge public/private debt. A trade war may clarify what is important.

The one crying about “nobody wins a trade war” are those profiting from unlimited consumerism fueled by bizarre levels of nation debt. Without this dynamic going on, China would not be nearly as powerful a potential adversary as it has proven today.

I’ve read your blog for quite a while and you have been consistent on trade. However, since every other Industrialized Country and most of the third world low wage countries already use a VAT tax which is rebated or not charged on their exports how does it help America to simply say we believe in Free Trade and not do the same thing. Doing the same thing as the rest of the world does not seem like a trade war to me. Not doing the same things seem like simply bending over and taking it from the rest of the world.

“Big importers including retailers, apparel makers and the billionaire Koch brothers have united against the proposal, arguing it would cripple businesses that cannot source their products in the US and force them to raise prices for consumers.”

A Republican president at war with the Koch brothers and (although not actually named) the Walton family. This just gets better every day.

If we impose tariffs on Chinese imports, can’t the Chinese just export to say Japan and then Japan export to the US? Japan would collect a small fee that is far less than the import tax. Or would we impose tariffs across the board on all imports?

It is too late to advise against a trade war with China, which the People’s Daily is also warning against today. We have been in a trade war with the Chinese regime at least since June/July, 2015, when the capital flight started out of China. If there was no trade war, China would not have capital controls in place, and its stock markets would be trading freely. Western companies that moved production to China got nervous about getting their money back out and put it to the test, the result being the markets crashed, the Chinese froze stock sales, and the question became how to account for owning worthless stocks in the Chinese ponzi. Foreign exchange is being smuggled out of China every possible way.

As things stand, Xi is taking personal control of the military and putting military people in key administrative positions. It looks like he is preparing a military dictatorship to replace the communist bureaucracy, because things over there look like financial armageddon is on the way. The regime is printing money like Venezuela to pay the bills. It could trigger a rebellion, if bank runs start, and China’s historical record shows that every 50 to 200 years the people rise up and slaughter everyone in the ruling dynasty to settle grievances. Xi knows that. It is the Chinese people, who are on the short end of the stick for having made consumer goods for Americans for the last 20 years, because when the Yuan devalues they are going to lose their savings once again, just like in Deng’s devaluation of 1992.

From now on corporate America, if you think you will replace American bank workers with ATM’s without paying a tax, forget about it. If you think you will replace American truck drivers with self driving tractors without paying a tax, not gonna happen. If you think you will replace American factory workers with robots and automation without paying a tax, I say no. Make America great again!

The tariff system needs to be completely reevaluated. I import a product from Switzerland and there is no tariff code to match my product, so they just use the closest thing that costs me 5.7% when the product doesn’t exist anywhere in the US. This added cost forces me to raise my prices which negatively affects my business.
If Trump can dismantle a lot of the insane regulations that make it so costly to build product here, the good for him. All the wage laws, pollution laws, liability laws, benefits laws, etc need to be reevaluated. It’s getting almost impossible for small businesses to survive today because of all this mandated pressure. We just attended the Shot Show in Vegas and I talked to a lot of business owners that are desperately looking for product that isn’t sold on Amazon or Ebay that they can make money on. Any product that has been commoditized on the net takes away any decent margins. If you are not a distributor or manufacturer, then you don’t have a chance in today’s retail market. If Trump were to increase tariffs on imports, then how long would it be before we could build manufacturing back to the point, where we could build the products here? And of course, the pricing of the products will be substantially higher and unless wages keep up, it becomes a zero cost game.

I found this article and Trump needs to hit this first. Stop the Chinese from dumping product directly to American consumers that is subsidized by the US taxpayers:

If the US refused to import chinese steel/etc. for two weeks, would you describe that as a trade war?

Trump is merely reminding both the US political establishment & the rest of the world that the US has leverage and is willing to use it.

The US & it’s contemporary “free trade” policies are losers because the interests of global corps. have supplanted the interests of US citizens in these trade deals – we simply give state-less corporations what they want, while the US worker is no longer represented at all.

Trump is simply re-asserting the leverage that naturally accompanies the largest single market in the world. When the negotiation phase is over, our new trade deals will not be overly protectionist… they will likely promote ‘free trade’ more so than the deals they are replacing.

Mish I don’t like the import tax r the trade war that is beginning. Remember back with Reagan the dollar got way too strong so the Plaza accord was implemented to secretly take down the dollar to help reduce our trade deficit .Still u haven’t answered my question of what we can do about this massive deficit which with China is nearly a billion dollars a day. YOU are the president so what do u do to address this problem? Soon China and others will b able to buy and control huge amounts of American assets!

Going back to Reagan, he also imposed quotas on Japanese car imports. As a result Japanese car makers built factories in the US, and of course it is cheaper, too. This was not extended to others, but it works quite well, now.
IMHO, cars imports was a good thing; otherwise Americans may still be driving boxy cars with too much chrome on them, but without government help the car industry would have gone the way of consumer electronics.

TARIFFS or any thing that resembles them will not work. They never have and never will. Industry moved from Wisconsin, Michigan, Pennsylvania, etc to the South. That is tantamount to jobs “going over seas” for the workers in those northern states that lost their jobs. I don’t recall anyone in Michigan moaning that those low wage workers in lets say Alabama or Tennessee stole their jobs, and the Michigan legislature needs to tariff goods from Alabama. In fact, that very thing occurred under the Articles of Confederation, and it was quickly leading to a complete collapse in trade among the several states at the time. The Constitution’s Commerce Clause is a direct result of those “tariffs” among the several states. The fact of the matter is that those jobs left the north for a more friendly business environment in the south. Some then left for even friendly business environments overseas. The consumer won by paying less in both cases. Those jobs that did stay in the U.S. were quickly replaced by 1) a robot or 2) completely eliminated through production methods that increased productivity.

Everyone runs a “trade deficit” with your local grocery store or car dealership, but the world keeps on spinning doesn’t it?

Mish is dead on about this. You will pay much higher prices for your stuff, and the jobs that Trump is promising will not materialize. We will all be worse off in the end.

Many “Republicans” railed against Ron/Rand Paul for being isolationist when in fact they are both non-interventionists when it comes to foreign policy, but 100% for free trade. It certainly looks like the Republicans got the isolationist they were so afraid of in Trump. Good luck with that.

President Trump on Wednesday signed two executive orders on immigration, including one that directs federal agencies to begin construction of a wall on the border with Mexico, his signature campaign promise.

One of the orders signed by Trump calls for the construction of “a large physical barrier on the southern border,” according to White House press secretary Sean Spicer.

!!!

I’m not saying you should like Trump but he”s doing what he said he would do.

China will hurt more. They buy govt debt to gain export markets and manufacturing expertise as the west outsources to cheaper labor. Chinese society is wonderful in many ways but it is not innovative. Remember, this is the place that had gun powder but never made guns. That hasn’t changed and continues to be their prime weakness. They need us much more than we need them. I think Trump understands this.

Cheap imports are great, until you don’t have a job to pay even those low prices. If Americans are given the choice of having a job or being able to buy a car for a couple grand less, it would be much wiser to pay the higher price because, without a job, one won’t even be able to buy that cheap car.

now the average joe is going to be working more and getting less, (paying for for consumer goods) at those shit jobs that went overseas, hours of mind numbing factory labor. i just hope those factories are in the middle of red states so those people (who voted for Trump) can get their fill of hard work and nothing to show for it. welcome to the gulag comrades

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